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Economic vs. Physical Occupancy

Not many self-storage owners understand the difference between the economic and physical occupancy of their facilities, not even those who have been in the business a long time. A savvy operator understands that 100 percent occupancy is not the goal of your business. The objective is the maximization of profit, which comes from getting the most money you can out of existing customers while still having product available to sell prospects.

What's the Difference?

Physical occupancy refers to the actual number of units you have filled. How does economic occupancy work? If you have 100 units, 80 percent of which are rented at full price, your physical and economic occupancy are the same: 80 percent. Now let's say you have an additional 10 units rented on a two-for-one discount. In this case, your physical occupancy is 90 percent, but your economic occupancy is only 85 percent, because you are only fulfilling 85 percent of your total possible rental income. Even if all of your units are filled at full value, your economic occupancy could exceed 100 percent. How? Through the collection of late fees, of course.

The ideal is "optimum occupancy," which involves physical occupancy that hovers in the 90 percent range. In a perfect world, we would have exactly the same amount of tenants moving out as in every month, but this is generally not the case. So what happens if your physical occupancy goes above optimum? You raise your rents—and quickly. Allowing physical occupancy to go above 90 percent will not only leave you nothing to sell new customers (thus wasting your advertising dollars), it will create a market that attracts competition.

There are at least two organizations out there whose sole mission is to call around to all of the storage facilities in the country and find out which ones are running at full capacity. What do they do with this information? They sell their research to prospective builders as indications of where to develop. Do you want to invite new facilities into your neighborhood? I didn’t think so. Keep your rates high enough so you always have something to sell, maximize revenue and discourage competition.

Fear Not

I talk with a lot of owners whose businesses are in trouble, and it's amazing how often I hear their facilities used to thrive. Usually, it's because they were the only game in town. It's not too difficult to prosper without any competition! These owners bellyache about how things have changed, with nine out of 10 telling me stories about how they “used to be full all the time.” They reminisce about when they had a waiting list.

The fact is they shouldn't be mourning the change in occupancy. They used to operate their businesses without maximizing revenue. They should have raised rents to even out supply and demand. No doubt a clever businessperson saw these sites were consistently full and built a new facility (or two) right down the road. Who wouldn’t?

Don’t be afraid to bump up your rents based on physical occupancy. It's the only way to maximize your economic occupancy. Every month, look at how many rented units you have in each size category. When you have only a few left in one size, increase the rent a few dollars per month. If you have to increase rates four times a year, so be it. Your prices should not be based on emotional factors, i.e., fear of upsetting customers. They should be changed based on logic, which dictates rents should be raised when certain occupancy levels are achieved.

What about existing tenants—when do you raise their rents? The answer will disappoint you: It depends. As a general rule, you need to raise them at least once a year. If you are in a highly competitive market, this may be as often as you can get away with a rate hike. Under normal circumstances, people are prepared for a slight annual increase. If your service has been good, they will accept it with very little static.

Unless you are in the most highly competitive of markets, rents should be increased regularly to maintain an optimum physical occupancy of 90 percent. This will translate to maximum economic value. If you don't feel confident in raising prices, either because of concern over customer reactions or faltering business, perhaps you aren't making the most of your marketing. Look at your numbers monthly and adjust rates accordingly, every time occupancy demands it.

Fred Gleeck is a profit-maximization consultant who helps self-storage owners/operators during all phases of the business, from the feasibility study to the creation of an ongoing marketing plan. He is the author of